Bat Shells Out $1.71bn To Buy Back Mexican Cigarette Unit

In a near replay of the ITC saga, BAT Industries has been forced to spend $1.71 billion to buy-back a cigarette company in Mexico which it was forced to sell because of government regulations back in the '70s and '80s.

BAT will instantly get a 53 per cent share of the Mexican market by buying back Cigarrera La Moderna, the country's biggest cigarette maker. In 1989, BAT sold a 45 per cent stake in CLM for $80 million. Mexicans smoke nearly 47 billion cigarettes annually making the country the world's 15th largest cigarette market.

BAT had reduced its holdings in CLM in a manner that was remarkably similar to what happened in ITC during the '70s. It began lowering its holdings because of laws that were hostile to foreign ownership. In 1989, it decided to sell out completely to a local tycoon. This is much the same story as what happened at ITC in the mid-'70s when BAT lost interest in the company. BAT now holds roughly about 34 per cent in ITC but there have been rumours, that it has been buying shares in the market. The company has denied these rumours.

One reason for BAT's break with former ITC chairman K L Chugh is said to have been because he refused to help with the multinational's plans to buy back a majority stake in ITC. Such a deal would have been extremely similar to the Mexican deal.

BAT said that the Mexican deal would be revenue neutral in the first year and analysts have already been critical about it. The Financial Times commented: "At a time when investors' appetite for cigarettes is cool, BAT has done a deal which may not enhance next year's earnings." However, BAT chief rival Philip Morris recently spent $400 million to get a controlling interest in Cigatam, which is the other leading cigarette company in Mexico.